October 12, 2023

Internal Revenue Code (Code) Section 129 allows employers to provide dependent care assistance benefits for their employees on a tax-free basis. These benefit plans are referred to as dependent care assistance programs (DCAPs) or dependent care flexible spending accounts (FSAs).

Most DCAPs are structured so that employees make contributions on a pre-tax basis through a Code Section 125 cafeteria plan. As a general rule, married employees who file a joint tax return and unmarried employees may contribute up to $5,000 each year to their DCAP accounts. The annual limit for married employees who file separate tax returns is $2,500.

Benefits that an employee receives from his or her DCAP account are non-taxable if:

  • The expenses are for the care of one or more qualifying individuals (for example, a child under the age of 13); and
  • The employee incurs the expense in order to enable the employee (and the employee’s spouse) to be gainfully employed.

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